Thailand's military-appointed

government raised the specter of protectionism and sparked a steep drop in stock prices Tuesday when it acted to halt

the longstanding practice of using nominee firms to bypass the 49% foreign

ownership restriction.

The market responded with a 17 point drop on the Stock Exchange of Thailand, or nearly2.7 percent, after the cabinet

announcement. Coming in the wake of recent bombings, capital controls and political uncertainty, many analysts expect things to only get worse for the bourse,

which has been battered in the past three weeks.

While full details of how the move will be implented are not yet clear, the nationalist-inspired action appears aimed largely at

punishing Singapore-government run Temasek Holdings, which purchased

telecommunications giant Shin Corp from deposed prime minister Thaksin

Shinawatra’s family a year ago this month.

Brokers and other analysts were not surprised but they were

dismayed, seeing the regulations as a case of politics intervening to hurt the

economy. “I had hoped that a compromise

would prevail and prevent this from coming out of the Cabinet today, but no.

This to me is the worst case,” wrote Andrew Stotz, head of Thailand research at Citicorp Securities in Bangkok, in an email with

the subject line exclaiming “THEY DID IT!”

Fortunately for

many, the new rules will not be applied retroactively for the thousands

of companies using nominee shareholding structures that are not operating in

sectors supposedly vital to national security or Thai culture.

Companies that fall under so-called “List Three” of the

Foreign Business Act, which designates sectors in which Thailand is

supposedly not ready to compete, will merely need to apply for an Alien

Business License to continue operations. This list includes everything from

rice milling and construction to accounting, legal services, hotel management

and brokerages.

“The good news is that major investments will not be

affected, although the revision will hurt foreign direct investment to some

degree,” said a Western diplomat who monitors economic activities. “It’s not

terrible, but it’s not good either. It’s like staring into the abyss and

realizing you’ve still survived.”

Even so, the measures appear to achieve the potent political

goal of hitting Temasek’s Shin Corp deal, which was done using a complex

structure of holding companies and sparked considerable outrage, both because a

foreign firm grabbed a blue chip telecommunications asset and Thaksin’s family

avoided paying taxes on the deal.

Complaints by the main opposition Democrat party at the time

led to a Commerce Ministry investigation on whether one of the holding

companies, ostensibly owned by Thais, was actually controlled by Temasek. Turns

out it was nothing unusual – just like the nominees set up used by thousands of

other foreign-run companies in Thailand.

Although the Democrats and others sought to vilify Temasek,

Shin and Thaksin, the 73.3 billion baht tax-free deal actually followed

standard operating procedure in Thailand

for the past 30 years. Any attempt to single out Temasek as a villain would be

impossible.

When the generals took out Thaksin by force last September,

some thought the political fight against Temasek would fade into the

background. But the uproar over the Shin deal made it impossible for the

generals to do nothing.

The old law said that a company’s nationality is determined

by its shareholders, not its voting structure. Thus, a company could be

majority owned by Thais but still controlled by foreigners, ala the kind of holding

companies Temasek used.

Pending a mandatory legal review, the new law passed by the

cabinet Tuesday will say that a company will be considered foreign-owned if

offshore investors control more than 50 percent of either shares or voting

rights. That would make Temasek the owner of those holding companies in which

it controls more than 50% of votes, even if it holds less than half of the

company’s shares.

Finance Minister Pridiyathorn Devakula said companies

operating in sectors which deal with

national security, culture and other “special” businesses, have one year to

reduce shareholdings and two years to reduce voting rights.

But, in another twist, the government also said the rules

“don’t apply to any company under investigation.” That includes Kularb Kaew,

one of the holding companies in the Shin deal that was already ruled a nominee

of Temasek. It also includes Norway’s

Telenor, which indirectly owns mobile

phone operator DTAC, the major rival of market leader Advanced Info Service, a

Shin subsidiary acquired by Temasek.

At some point,

Temasek will also have to sell down its holdings in iTV, Thailand’s sole independent television station

born out of the 1992 pro-democracy protests that fell first into the hands of

Thaksin and then the Singapore

government. Running a television station is on the list, along with putting out

a newspaper, rice farming, land trading and making images of Buddhas.

The property sector

is due to be hit hard. Many foreign run companies buy and sell land in resort

areas like Phuket and Koh Samui, and they will now be forced to sell down their

holdings. That could spark a massive exodus as firms struggle to comply with

the new requirements.

“How can you trust anyone with more than half of your business?” Larry

Cunningham, managing director of Phuket One Real Estate, said in a recent

interview.

Kitti Nathisuwan, head of research at Macquarie Securities

in Bangkok,

told Asia Sentinel: “The nationalistic elements are running through the room.

They are basically telling foreigners: ‘We don’t want your money.’”

Another analyst, Vikas Kawatra of Kim Eng Securities, wrote

in a research note that “Imposing restrictions on FDI is simply wrong—even

though the intention behind the move is to punish the deposed PM Thaksin

Shinawatra. I think these two steps aren't the last silly moves expected from

this government.”

Pridiyathorn claimed

that the revised law simply brings Thai law in line with global standards. He

plans to make the rounds of foreign business associations in the coming days to

further explain what the government has in mind.

But no matter what,

the move is seen as a clear retreat into protectionism at a time when the rest

of the region is opening up. Peter van Haren, chairman of the Joint Foreign

Chamber of Commerce in Thailand,

which represents more than 10,000 businesses, has said that protected lists should

be eliminated altogether.

The argument is

simple. The lists were drawn up in 1972 to protect sectors in which Thai

companies are not competitive. Yet 35 years later, those companies are still

not competitive.

“We wonder

how long it would be protected?” he told the Bangkok Post last month. “With no

free competition, the winners are the ones who control business, but the losers

are the end users or consumers.”

This longer term thinking may contain more vision than an

appointed government slated to serve for just one year is required to come up

with. Many of the new leaders, including the prime minister, are ex-soldiers

bent on preserving the status quo and hurting Thaksin, whose economic policies

were hailed by foreigners, rural Thais and many businessmen.

At some point, the country’s leaders will need to stop

looking to the past and start looking at where they want Thailand to go

in the future. At the present, many think it’s only moving backward.

“The foreign content of the Thai economy is very important,”

said Sompob Manarangsun, an economist with Chulalongkorn University.

“We can’t just say we don’t need foreign capital anymore because the baht is

strengthening. The global economy is becoming more and more open. Even emerging

countries like Vietnam and India are

opening up. We cannot do the opposite and start retreating.”